THE BLOG
10/05/2010 09:30 am ET Updated May 25, 2011

Finally, a Tax Compromise That Makes Sense: DeFazio/Kaptur

I recently wrote about our perverse individual income tax regulations which, since 1980, have been manipulated literally out of control, to the particular benefit of the wealthiest Americans so that, purportedly, they can 'trickle down' their wealth to the poorest, which of course they almost never do. And then I wrote about the tax policy of the Republicans in Congress today, and of the Tea Party candidates, that even with unprecedented individual income inequality would further gut and in some aspects even abandon completely our nation's fundamental principle of progressive taxation.

Sometimes this manipulation takes the form of taxing ordinary income as capital gains. Sometimes, it's offshore accounts and deferrals that unfairly keep taxes unpaid. Currently, most perverse of all, it's trying to permanently preserve the Bush tax cuts for the richest American taxpayers, which according to the nonpartisan Tax Policy Center would cost the federal government an almost unbelievable $680 billion in revenue over the next 10 years.

President Obama and the Democrats in Congress want to preserve the Bush tax cuts that benefit the middle class and lower income earners, while letting those provisions that benefit only people with very high incomes expire on schedule at the end of this year. The Republicans disagree. And thus things sit, even though, unfathomably, under the Republicans' plan, nearly all of the benefit of the extension they're seeking would go to the richest 1% of Americans, people with incomes of more than $500,000 a year. The majority of even this amount would go to the richest one-tenth of one percent, the least wealthy of whom have annual incomes of more than $2 million and the average of whom makes more than $7 million a year.

Republican House Minority Leader John Boehner and his compatriots would have us believe that they are the only ones standing in the way of the complete ruin of American small business and the American family farm. According to Boehner, Republicans will do everything they can to protect these businesses and farms even if it means Republicans have to -- have to! -- push for continued tax cuts that overwhelmingly benefit the extremely wealthy.

Politically and rhetorically, the Republicans are accomplishing a great sleight of hand by focusing on the small number of small businesses and farms that would be affected, skewing a debate that should be about efficient government spending and tax fairness. Democrats -- as we often do -- have allowed Republicans to get away with this tactic for too long, and until this past week, I had pretty much given up hope for any thoughtful 'compromise', particularly a compromise which would materially help jumpstart our jobless economic recovery.

Well, thank God for Representatives Peter DeFazio (D-OR) and Marcy Kaptur (D-OH), who just put forward a proposal in the House that I believe no responsible Member of Congress -- whether in the House or the Senate, whether Democrat, Republican or Tea Partier -- should find objectionable.

This proposal, this 'compromise', would extend the 2001 tax cuts for all small businesses that might be subject to the top two tax brackets if these businesses can merely certify that they are manufacturing in the U.S., only hiring American citizens, and generally buying domestic content goods and materials. Very simply, each small business would seek certification by meeting the common sense standards that its headquarters and manufacturing are in the United States, its manufacturing uses at least 75% domestic content, it verifies its workers using "E-Verify" and does not use temporary visas, and it has not outsourced its labor or manufacturing overseas. Representatives DeFazio and Kaptur note that companies which would realize this lower tax rate range from software companies to bicycle manufacturers to poultry producers to call centers -- and frankly every small business in between.

The DeFazio/Kaptur compromise would drive down the cost of extending the Bush tax cuts while more effectively promoting job creation than could ever result from extending the tax cuts for the top two individual tax brackets. This effort to reward small businesses that are operating in the best interests of our nation is not only right for them -- it's right for all American workers and the American economy.

Of course companies don't have to meet these standards, they just wouldn't benefit from the tax cut extension. As Defazio and Kaptur have sensitively noted, if Congress is going to extend the upper tax brackets to anyone, it should be to small businesses that create American jobs and generally use American goods and materials. Importantly, the consequent loss of tax revenue to the Treasury associated with this proposal would be far outweighed by the long-term benefit to the overall economy from the positive ripple effects of directly stimulating these small businesses.

The several "Make it in America" bills which the Democrats have already advanced in the House would, if they ever get through the Senate, be of exceptional benefit to our struggling economy. But DeFazio/Kaptur would, on its own, generate very positive outcomes.

(Over time, the 'answer' to the Bush tax cuts issue - and to all individual and small business taxation issues - is a tax system with more brackets and thus more stratification, so that the super-rich pay higher rates, instead of a tax system that has a family or small business that earns $250,000 a year paying at the same tax rate as a family or business earning tens of millions of dollars.)

Let me close by offering the hope that the wisdom of Reps. DeFazio and Kaptur, and of their like-minded colleagues, can overcome the ongoing nonsensical opposition in Congress to thoughtful tax reform and job creation initiatives -- opposition of the sort that we are seeing in the Senate right now related to two bills also with very sound concepts.

The first of these bills would give companies -- all companies -- a break on the employer share of the Social Security payroll tax for creating new jobs in the United States. The other bill, introduced by Senator Dick Durbin (D-IL), would provide tax breaks to U.S. companies that bring jobs home from abroad, and would end certain tax credits, deductions and deferrals for U.S. companies that move jobs overseas. In the first bill, in order to get such tax relief, a company would simply have to certify that a new U.S. worker is replacing an employee who'd been working overseas. In the second bill, in a very simple way we would, as Senate Majority Leader Harry Reid has said, be "taking away the incentives corporations now have to send our jobs overseas, and giving them powerful new incentives to keep American jobs in America."

Yet Republicans say, with no supporting evidence whatsoever, that these measures "wouldn't do anything to create jobs on U.S. shores." Even more unbelievably, Senate Finance Committee Chairman Max Baucus, a Democrat for Heaven's sake, says that these two bills would "put the United States at a competitive disadvantage." (Of course, Senator Baucus, this is the same United States that today already has the largest trade deficit in the history of the world and real unemployment of 20%.)

No surprise, but disappointing nonetheless, on the very same day that the senior Senator from Montana was effectively dissing unemployed American workers in those states which don't have the luxury of only 4% unemployment (as Montana does), the U.S. Chamber of Commerce and the Business Roundtable of CEOs sent letters to all Senators urging them to vote against both Senate bills, while urging them to extend the expiring Bush-era tax cuts for the wealthiest of American taxpayers.

Here's hoping, Congressman DeFazio and Congresswoman Kaptur, that your proposed 'tax compromise' becomes a model for everyone in Congress, starting with John Boehner and Republican Senate Minority Leader Mitch McConnell, and that even the Democrats' own Senator Max Baucus sees its wisdom and the wisdom behind the entire Make it in America legislative agenda.

It wouldn't hurt to also see the White House get beyond its own rhetoric and proactively address - head-on - the challenge of job creation in the America, starting with an enthusiastic embrace of DeFazio/Kaptur and its related job creating legislation.

Leo Hindery, Jr. is Chairman of the US Economy/Smart Globalization Initiative at the New America Foundation and a member of the Council on Foreign Relations. Currently an investor in media companies, he is the former CEO of Tele-Communications, Inc. (TCI), Liberty Media and their successor AT&T Broadband. He also serves on the Board of the Huffington Post Investigative Fund.